Identifying Structural Breaks in Cointegrated Vector Autoregressive Models (2010)

posted Apr 23, 2010, 5:54 AM by Håvard Hungnes   [ updated Apr 28, 2010, 5:28 AM ]
Oxford Bulletin of Economics and Statistics (2010), forthcomming. DOI: 10.1111/j.1468-0084.2010.00586.x

Abstract: This article suggests an alternative formulation of the cointegratedVector autoregressive (VAR) model such that the coefficients for the deterministic terms have straightforward interpretations. These coefficients can be interpreted as growth rates and cointegration mean level coefficients and express long-run properties of the model. For example, the growth rate coefficients tell us how much to expect (unconditionally) the variables in the system to grow from one period to the next, representing the underlying (steady state) growth in the variables. The estimation of the proposed formulation is made operationally in GRaM, which is a program for Ox Professional. GRaM can be used for analysing structural breaks when the deterministic terms include shift dummies and broken trends. By applying a formulation with interpretable deterministic components, different types of structural breaks can be identified. Shifts in both intercepts and growth rates, or combinations of these, can be tested for. The ability to distinguish between different types of structural breaks makes the procedure superior compared with alternative procedures. Furthermore, the procedure utilizes the information more efficiently than alternative procedures. Finally, interpretable coefficients of different types of structural breaks can be identified.